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Public Debt: A Runaway Train Wreck

Canada is in debt. In 2014, the federal public debt is in excess of $600 billion; if you are Canadian, your share of that federal accumulated debt is $17,500. The debt grows by over $49 million every day; over $2 million every hour.[1]

These numbers are staggering, but they tell only a partial story. The provinces and territories have amassed in excess of half a trillion dollars in debt as well: $547 billion to be exact.[2] Accordingly, Canada’s total public debt is a just shy of $1.2 trillion, or a sobering $33,800 per Canadian (exclusive of unfunded pension liabilities).

Currently, eleven cents of every tax dollar goes toward servicing the above debt.[3] If Canada could have avoided paying $31 billion in interest, it would have recorded surpluses in the last several fiscal years. No past debt would have meant no current deficit!

The International Monetary Fund has warned that if Canada does not reduce its spending from 43 percent to 38 percent of its gross domestic product (GDP), the inevitable result will be higher tax burdens, dangerous debt loads, or both.[4] As countries of Western Europe such as Greece, Italy, Portugal, and even Great Britain have all painfully demonstrated, growth in public sector spending in excess in the growth of the economy cannot continue indefinitely. High deficits and growing public debt inevitably lead to higher interest rates, higher exchange rates because of a devalued currency, and eventually to capital leaving the country.

There are other direct and immediate consequences of public borrowing. With eleven cents of every tax dollar going to pay interest on the federal debt, that is 11 percent of federal revenues available to fund programs and services. The current generation must pay for past borrowing and therefore deny itself 11 percent of the services it is actually paying for. The same will be true tomorrow. Public debt mortgages our country’s future and imposes higher taxes on future generations, who will be forced to pay for our current borrowing. Paying taxes for a previous generation’s consumption is the ultimate violation of the principle of “no taxation without representation!”

But the principle of no taxation without representation exists to ensure that taxpayers are not overly burdened. Parliament was created in the thirteenth century when King John agreed to submit his requests for taxes to a House of Commons. This time-honoured principle remains, at least in theory, to the present day. The government must submit its spending estimates to the democratically elected Parliament. The government can only spend money once Parliament has approved and authorized it.

But in the last half-century, Parliament’s ability to hold government to account has declined significantly. At the same time, Parliament’s ability to control the public purse strings has been increasingly compromised, and now is almost completely neutered. The result of this increasingly weakened parliamentary oversight of federal public spending has been a runaway train of spending and dangerously accelerating public debt.

In 1970, the federal public debt was $15.3 billion. By 1980, it had grown to $61.6 billion. By 1990, it had exploded to $336 billion. In 2000, it had grown at a somewhat decelerated rate to $550 billion. It actually fell to $477 billion by 2010; but recent out-of-control spending has caused the federal public debt to grow to $526 billion in 2011, $558 billion in 2012, $587 billion in 2013, and $616 billion by the beginning of 2014.[5]

From $15 billion to over $600 billion in forty-three years, with over $125 billion of that additional debt added under the watch of the current Conservative government.

According to the Fraser Institute, “The bottom line is that the Conservative government is simply not budgeting in a conservative manner. Not only is it failing to conservatively forecast GDP growth and revenues, or [put] … forth realistic spending projections, it is not dealing with the root cause of the deficit: excessive increases in spending.”[6]

With the entire Canadian public debt, including that of the provinces, in excess of $1.2 trillion, many economists have warned all Canadian governments to stop searching for additional revenue sources and spend more time and energy finding ways to curtail and reduce their own profligate spending habits.

Several interrelated occurrences allowed Canada to increase its public debt by a factor of four hundred in less than fifty years. The first was Canadian society’s transformation from a post–Second World War industrial state to a welfare state and eventually to an entitlement state. Changing and increasing public demands encouraged governments’ attempts to do more and more. Social-engineering bureaucrats were only too eager to design programs to improve the human condition and to attempt to satisfy a growing population’s insatiable demand for programs and services that somebody other than they would pay for.

The second factor, occurring at almost exactly the same time, was a slow destruction of government’s tools for ensuring financial accountability. Sequentially, our system of public financial checks and balances was eroding. The second trend allowed the first trend to progress unabated. Government could spend money, confident that there existed inadequate (and, eventually, virtually non-existent) effective oversight. Parliament’s eight-hundred-year-old role in authorizing expenditures of the Crown and controlling the public purse strings was effectively coming to an end.

The consequence would be a federal state, with combined federal, provincial, and territorial debt of $1.2 trillion.

1. The Entitlement State

In the last half-century, Canada has transformed itself from a welfare state to an entitlement state. Mark Milke of the Fraser Institute defines an entitlement state as one “where everyone feels they are entitled to a handout or a guaranteed income or a perfect life courtesy of other people.”[7]

In 1962, in my home province of Saskatchewan, doctors went on strike and picketed outside of the Saskatchewan Legislature to protest against socialized medicare. A half-century later, almost any cut to any social program or even perceived inadequacy in the provision of that program (such as protracted surgical wait times) would result in public outcry and probable protest by the group or special interest affected. Our collective attitudes toward the role of the state in our lives have certainly seen gargantuan shifts during my lifetime.

Those changes continue today. The welfare state policies of the 1960s and 1970s, such as medicare, old age security (OAS), and Unemployment Insurance (now called Employment Insurance) have been joined by more-recent entitlement programs. Welfare-state programs were designed to provide necessary services and programs to those who were truly disadvantaged or were imperilled through no fault of their own. Entitlement programs, however, seek to improve the human condition irrespective of the group lobbying for the project’s situation, financial or otherwise. Museums, art galleries, opera houses, and arenas to house professional hockey teams, cater disproportionately to the most, not the least, fortunate members of society.

Moreover, there appears to be a real disconnect between government and the taxpayers it is pretending to represent. Fiscal conservatives understand intuitively that government does not create wealth and has no money or resources except for that which it taxes from its citizens and corporations. Fiscal spendthrifts believe, erroneously, that government can magically create resources of its own, and therefore can spend its fairy dust generously on all projects and programs without consequence. Most Canadians would likely fall into this latter category. But government has no fairy dust and does not create wealth; it merely redistributes wealth. It spends only resources taxed out of the private economy. When a government offers to a build an electorally popular project, it is bribing the electorate with its own money. As Margaret Thatcher famously said, “there’s no such thing as an entitlement, unless someone has first met an obligation.”[8]

This reality would be sustainable if government spending grew only in proportion to the growth in the economy. Both income and corporate taxes increase as GDP increases, and if government spending grew in sync with economic growth, there would be no public debt. But it is when the former grows unchecked, without sufficient regard for growth in the latter, that we find ourselves with over $600 billion of federal government debt.

The predominant economic theory of the 1960s and 1970s was that of John Maynard Keynes. According to Keynesian theory, society can borrow its way into prosperity. More precisely, during times of recession or minimal economic growth, governments can stimulate demand by borrowing, thereby creating economic growth. That may or may not be true economically; regardless, it is imperative that if borrowing occurs during recessed times that the monies be repaid during prosperous times.

However, reckless politicians, supported by special-interest groups, began attempting too much, and once a program was provided, it became politically difficult, if not impossible, to take it away. Moreover, convinced that the good economic times were here to stay, the same reckless decision-makers reneged on the obligation to repay debt when the economy was strong, preferring to delude themselves into believing that good economic times meant they could spend even more recklessly, frequently doing so “like drunken sailors.”

The provinces, municipalities, public-sector unions, and eventually even private business lobbied government to share the wealth during good times and stimulate demand in bad.

The result of bad political choices, based on a misunderstanding of economics, was decades of expensive and inefficient multi-level funding arrangements; a growing public sector, with pay, benefits, and pensions in excess of the private sector workers paying them; and, most troubling, industrial subsidies and corporate bailouts that took taxes from functioning parts of the economy to subsidize non-functioning sectors.

Industrial subsidies and corporate bailouts are perhaps the most troubling contributor to public debt. The public interest in supporting private enterprise is dubious, and there is growing economic data to show that subsidies and corporate welfare create neither economic growth nor stimulate jobs.[9] As the dollars used were originally taxed from sectors of the economy not requiring subsidy, the effect of industrial subsidy is to remove wealth from the functioning economy to prop up the parts working not quite so well.

Regardless, Industry Canada has disbursed $22.1 billion over the last half-century.[10] Again, $22.1 billion have been transferred from wealth-creating portions of the economy to support private, for-profit businesses apparently requiring subsidy to survive and/or grow. Of that money, $8.8 billion was dispersed in grants without even the prospect or expectation of repayment. Some dubious recipients of industrial subsidy, besides the giant car manufactures, include a bakery in Edmonton — it was given $1 million to develop gluten-free product lines of bakery items; other recipients include hot dog vendors, ice cream shops, pizzerias, and gas bars. A perusal of the list confirms numerous recipients received more than one grant, indicating that these subsidies become virtually permanent and the recipients dependent upon them. Why run your business more efficiently if Industry Canada has a program to subsidize your inefficiency?

Keynes understood that during times of recession, government spending could stimulate the economy; however, he never fully contemplated that future generations would endure reduced demand and investment due to its obligations to pay for the consumption of the previous generation. Paying back debt usually necessitates difficult and unpleasant actions, none of which are likely to improve the popularity of a government, so it is little wonder that governments rarely stop borrowing and even more infrequently pay back debt.

In 1970, all Canadian public spending (federal, provincial, and municipal) equalled 35 percent of GDP. By 1992 it had ballooned to 52 percent, but has been reduced to 41 percent currently.[11] However, the debt is growing again and is on track to do so for the foreseeable future. As a result, future generations will be forced to pay not only for the programs and services they consume; they will also be required to pay an excess of taxes to cover the debt of previous generations.

2. The Death of Fiscal Accountability

The public may feel a sense of entitlement and have an insatiable demand for government programs and services. Social-engineering bureaucrats and vote-seeking politicians might want to satisfy every craving and spend, spend, spend. But Parliament controls the purse strings. Parliament must authorize spending for the government to legally spend.

Surely Parliament, as guardian of the public purse strings, will ensure that government spending is appropriate and that taxpayers receive value for money.

However, tragically, Parliament’s oversight of public finances is almost non-existent. Concurrent to the demise of responsible government generally, Parliament has surrendered its traditional and constitutional role of providing financial oversight. With few exceptions, an emasculated Parliament provides almost no fiscal oversight; the Government of Canada spends as the Government of Canada wants to spend.

Canadians do not directly elect their governments; we elect our legislatures. If the government is not accountable to the elected Parliament, that government, by definition, is unaccountable.

For close to a hundred years, Canadian governments generally ran balanced budgets; successive finance ministers viewed the public finances as money held in trust for the Canadian people. They only spent what was necessary and balancing the budget was the norm. If a deficit was absolutely necessary, such as during the two world wars, the money was repaid in a timely manner once the exigency concluded.

Meanwhile, Parliament scrutinized all spending, department by department and line by line. As the size of government grew, though, this became an increasingly complex and time-consuming exercise. Accordingly, shortcuts were pursued to make parliamentary scrutiny more “efficient.” By the late 1960s, the system would come unwound; Parliament would surrender its most important role — guardian of the public purse strings.

In theory, and at one time in practice, Parliament would get to see the government’s spending plans as they were being tabled, in order to scrutinize said plans. The process by which departments estimate their spending plans for the coming fiscal year is appropriately called the “tabling of the estimates.” In minute detail, the estimates listed the department’s estimated or requested spending plans; each program is listed and estimated line by line. Only after Parliament had approved the estimates could the department legally spend the monies.

However, as government grew in the 1960s, the estimates became more voluminous, and Members of Parliament would get lost in a maze of lines and numbers. Scrutinizing of these detailed spending estimates would go into the dog days of summer, when MPs were thinking about the barbecue circuit and looking for an exit from Ottawa’s humidity. In the end, approving the estimates was growing too complex and time-consuming; rather than try to tackle the problem, most MPs elected to simply glance over the documents, rubber-stamping them; the process becoming little more than a formality. Eventually, government mandarins were so convinced that the estimates would be approved that they would proceed on that assumption. So the system of oversight was “reformed to make it more efficient.” In December of 1968, the House amended its standing orders. Reform resulted in the Standing Committees of the House being tasked with approving the estimates for the various departments, which fell under its jurisdiction. The committees would have to report the estimates back to the House by May 31 of each year, failing which they would be “deemed to have been reported.” The full House of Commons would then have until June 30 to vote on the main estimates. No longer would MPs have to scrutinize government spending once the kids were out of school!

For agreeing to delegate detailed scrutiny of supply to the House’s standing committees, the Opposition was granted twenty-five “supply days,” during which it would be able to move motions.

The system was breaking down, but it was not until 1972 that the demise of parliamentary oversight became complete. The end of the supply period was moved forward seven days to June 23, and Opposition supply days were reduced to twenty-two. If the estimates were not approved by the House by June 23, they would be deemed to be approved; Parliament had lost its most effective tool in holding government to account.

Under Standing Order 81(4)(a),[12] the leader of the Official Opposition may select the main estimates of two departments for consideration by the Committee of the Whole for a period not to exceed four hours. The rationale is that allowing a more selective focus on a couple of departments allows for a detailed examination.

During the Committee of the Whole, the Speaker vacates the chair and the minister of the chosen department brings officials and deputies onto the floor to assist in the answering of detailed questions. However, after the prescribed four hours has expired, the estimates are deemed approved and reported.

Moreover, whether examination of estimates occurs in the House committees or in front of the Committee of the Whole very little actual examination of numbers and spending plans occurs. Members, from all sides, prefer broad policy questions to any actual examination of the government’s spending plans.

For the last forty plus years, the spending plans for the departments of the Government of Canada have essentially been given automatic approval. Moreover, changes in internal administrative processes have allowed for more line items to be lumped together in broad categories. Line-by-line approval in the committees has been replaced by approval of a “grouping” of items. It is easy to hide spending within a broad grouping of expenditure estimates. Amalgamation of substantive line items has meant that critical information has been merged and lost, as has been financial accountability.

However, Parliament is not the only institution of oversight that has had its ability to monitor the government’s financial accountability diminished. The role of the Office of the Comptroller General was created to help rein in spending before it occurred. The mandate of the comptroller general was to assess spending approved by Parliament and ensure that there was actually enough money available to spend as Parliament had authorized. The Office of the Comptroller General was a check in the system and provided objective analysis as to whether, in fact, authorized spending was affordable and whether the government could cover its spending plans. This system was based on the understanding, commonplace in the days before serial deficit financing, that you cannot spend money that you do not have.

However, the office was neutered, based largely on the recommendations of the 1962 Glassco Report.[13] Glassco recommended removing bottlenecks of inefficiency in the system, thereby allowing managers to manage.

Of course, what Glassco considered bottlenecks I would have considered checks and balances. Regardless, the function of the comptroller general was transferred to the Treasury Board in 1967, and then eviscerated. In 1969, the office was abolished altogether. The comptroller general was re-established in 1978, but as a comptroller, it exists now only nominally and with a diminished role. The role of certifying and authorizing all department expenditures has been long removed and has been replaced by such functions as program evaluation, the provision of internal audits, supervision of procurement, real property management, and financial risk management.

What was once a powerful spending watchdog is now a mere staff agency within the Treasury Board Secretariat. The comptroller general provides financial management and functional direction, but in no way is it a check or balance over government finances themselves.

By the early 1970s, the government had effectively dismantled and/or assumed all the roles of budgetary oversight. Thereafter, government grew and overspent, resulting in growing deficits and, eventually, $600 plus billion in national debt. Government spends as it wants to spend and the people’s elected Parliament merely stands by and watches.

With all of the checks and balances of financial oversight effectively neutered, there has been no shortage of financial scandals, debacles, and boondoggles. It has fallen to the Office of the Auditor General and the newly created Office of the Parliamentary Budget Officer to hold government to account for its annual expenditures in excess of a quarter trillion dollars.

But as we shall see below, the auditor general (AG) only audits money that has already been spent. Its work, although increasingly valuable, is akin to closing the barn door after the cattle have all bolted. The hope is that you will learn something by the audit that will retain the cows in the future. The role of the parliamentary budget officer (PBO) had been designed to monitor the cattle before and as they were leaving. However, as we shall see in a subsequent chapter on the Public Service, the government that created PBO subsequently deliberately attempted to control it. Then it moved to politicize it. Eventually, it has tried discredit it. This change in the government’s relationship with the PBO has severely compromised the latter, ruining what could have been an effective and much needed check on government spending. The result has been a litany of deplorable spending decisions and mistakes.

In April of 2013, the auditor general reported that the federal government had lost track of $3.1 billion devoted to combating terrorism.[14] Between 2001 and 2009, the federal government allocated $12.9 billion across thirty-five departments and agencies with some aspect of public security in their mandate. But the AG reported that only $9.8 billion could be identified as having been properly spent. There was no allegation that the money was stolen or misappropriated, but 25 percent of the monies allocated could not be traced. Some was no doubt moved to other priority areas, while some was likely simply not spent since it was not allocated within the timeframe of the approved budget window.

The auditor general stated that the departments and agencies were required by law to report to the Treasury Board Secretariat on how the money was spent; but when the AG asked to see the reports, they were advised that they had not been prepared as required. Although most of the money was eventually traced, the fact that such a large amount of money could go missing shows what can happen when Parliament allows line items to be bundled together in the estimates: a breakdown in financial accountability.

Another recent example of the consequences of diminished financial oversight is the $2.5 million in advertising for the non-existent 2013 Canada Job Grant.[15] In this instance, the government continued to shill for this co-sponsored training program long after every province had refused to participate. Although no program existed, the government spent millions of dollars touting its supposed efforts in this area. Beyond that, government advertising generally is now in excess of $100 million annually. Much of it is ineffective, containing little valuable information; instead, it is often filled with little more than blatant partisan messaging.

A larger boondoggle was revealed on April 11, 2011, when it was reported that the federal government misinformed Parliament to win approval for a $50 million G8 fund that lavished money on dubious “security” projects in several Conservative ridings, including that of Treasury Board President Tony Clement. Auditor General Sheila Fraser reported that the process by which the fund was approved “may have been illegal.”[16]

And of course there was the Sponsorship Scandal, when for six years money was transferred to Liberal-friendly advertising agencies without competitive bids and sometimes without any actual work being done. The auditor general called the practice “scandalous” and “appalling.” Sheila Fraser concluded that $100 million was paid to a variety of Quebec communications agencies and that the program was designed to generate commissions for these agencies rather than produce any work of value for Canadians.

But the worst example of a lack of financial accountability occurred in 2000, when an internal audit at Human Resources discovered that $1 billion in employment program grants could not be traced.[17] There was no paper trail to determine if the money was properly spent or if the promised jobs were created.

As the above examples painfully illustrate, although audits are invaluable in reconstructing a scandal, boondoggle, or misappropriation, they obviously cannot prevent misspending. Regardless, the Office of the Auditor General is essential in determining if proper accounts are being kept, if money is spent for the purpose stipulated by Parliament, if effective spending controls are in place, and if generally accepted accounting principles are being followed.

The value of the auditor general’s reports is in how the government reacts and improves financial reporting. But as an after-the-fact evaluator, the AG does not and cannot exercise control over real-time spending. Only Parliament can do this; unfortunately, as the case below demonstrates, its ability to do so has been emasculated.

Perhaps the lowest point in the devolution of responsible government and financial oversight in Canada occurred in the spring of 2011. For the first time in Canada, indeed, for the first time in the entire British Commonwealth, a government was about to be held in contempt of Parliament.

The sad story began the previous October; the Finance Committee had requested estimates for a number of big-ticket government projects. The cost of acquiring F-35 fighter jets, the forgone revenue of corporate tax cuts, the costs associated with hosting the G20 summit and various crime bills, were all on the committee’s radar. The 40th Parliament was a minority Parliament; as a result, the Conservatives had five voting members on each committee, compared to three Liberals, two Bloc Québécois, and one NDP member, for a total of six combined opposition votes. Accordingly, the production motion passed; for four months, the government procrastinated, eventually only offering partial answers. The majority of the committee then found the government in contempt of Parliament for not complying with a motion of a standing committee of the House of Commons. Thereafter, then–Liberal Leader Michael Ignatieff used one of his supply days, mentioned earlier, to move a motion of non-confidence in the government.

A vote of non-confidence, according to the Leader of the Official Opposition, would confirm our commitment to parliamentary democracy and its fundamental principles. The chief principle that had been compromised was the government’s obligation to “provide Members of the House with the information they need in order to hold the government accountable to the people of Canada.” In an impressive speech defending responsible government, Ignatieff stated that “when Government fails in this most elementary task of democratic freedom, it is the duty of the Members of the House to bring the government down.”[18]

The motion of non-confidence came to a vote in late March of 2011. The motion carried by a vote of 165 to 145, predictably breaking entirely on party lines. As a fiscal conservative, I am now embarrassed by my vote of “nay,” but drunk on the daily diet of “partisan, coalition-conspiracy” Kool-Aid, I certainly did not feel ashamed at the time.

In kicking off his campaign, the Liberal leader claimed that the Canadian people will “have the opportunity to replace an arrogant government with one that respects democracy.”

For being the leader of the first government, not only in Canadian history, but in the history of the entire British Commonwealth, to have been found in contempt of Parliament, the Canadian electorate “punished” the prime minister by electing 166 Conservative MPs, giving Stephen Harper his long-desired majority government. Responsible government was actually borne out: lose the confidence of the House and it is necessary to either resign or seek a fresh mandate from the electorate. But financial oversight was now a distant memory. A minority government could withhold relevant financial information, be found in contempt of Parliament, lose the confidence of the House, and then be returned with a majority!

With the check and balance of financial scrutiny diluted beyond repair, safeguards against irresponsible spending have been severely compromised. The emasculation of the comptroller general and the practice of deeming estimates approved on June 23, rather than actually vetting them, has resulted in the destruction of parliamentary oversight, overspending, and the death of financial accountability. The events leading to the election in the spring of 2011 confirmed that a government can ignore legitimate parliamentary requests with complete impunity.

In the forty-five years since Canada starting disassembling financial oversight, spending has increased in both good and bad economic times, resulting in growing deficits and accumulated debt. With an accumulated debt of over $600 billion dollars — a debt that is growing by $49 million every day — we will be paying for these bad decisions and this deficient financial oversight for generations.